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Is A Strong US Dollar Good Or Bad For The World?
Perspective | 21 May 2013
By: Kathy Lien
Articles (9) Profile

This article contribution is written by Kathy Lien, Managing Director of FX Strategy at BK Asset Management

If you have been watching the forex market over the past few months or even opened a financial newspaper, you may know that the USD has been on a tear. Since the beginning of the year, the Dollar Index, which is a trade weighted measure of the currency’s value increased nearly 6 percent. On a more granular level, since January the USD is up more than 15 percent against the Yen and more than 6 percent against the British pound and Australian dollar. Currencies such as the Euro also became weaker as a result of the strength of the USD but its 2.5 percent loss is moderate compared to the steep decline in value of the Yen, GBP and AUD. The relentless rally in the USD has also hit home for Singaporeans who have seen the S$ drop to its lowest level against the USD in 9 months.

Rising U.S. stocks and U.S. Treasury yields is making the dollar extremely attractive to foreign investors who are worried about capital preservation as much as they are looking for capital appreciation. The dollar is performing well because the Federal Reserve is currently on a different monetary policy path than other central banks – the next move by the Fed will most likely be to taper asset purchases, which would constitute a reduction in stimulus. This comes at a time when the European Central Bank and policymakers are considering more aggressive monetary easing. With the Eurozone in recession and Australia suffering from weaker domestic and Chinese growth, investors are hard pressed to find better opportunities.

Policy Makers Remain Silent
When currencies have exaggerated moves, central bankers will oftentimes comment but so far we have not heard a peep from policymakers around the world. The reason why there has been virtual silence is because a strong USD is good for the world especially when inflation is not a problem. In fact, recent efforts taken by central banks around the world are aimed at bolstering their economy and providing their country with a competitive advantage. A weaker currency helps to accomplish that goal by increasing the purchasing power of Americans and making the exports of countries such as Japan and Australia cheaper. Typically, policymakers complain about a strong currency and not a weak one but in the case of the United States, a strong dollar is not a big problem because the US is not an export dependent economy.

Aside from helping the export sectors of countries around the world, a strong USD also helps to keep commodity prices in check. Many commodities are priced in USD and the recent surge in the greenback has driven commodity prices sharply lower. Some of the biggest moves were seen in metals such as gold and silver. Gold is down almost 19 percent year to date while silver is down over 25 percent. The price of other based metals such as aluminum, lead, copper and zinc have fallen sharply as well since January and similar moves can be seen in the prices of wheat, sugar and lumber. The only high profile commodity that hasn’t budged is oil. Typically the greatest fear that central banks have about a weakening currency is inflation but since the strong dollar is keeping pressure on commodity prices, the Eurozone, Japan, Australia and other countries including Singapore are basking in the benefits of a strong USD. In fact, a weaker currency given enough of a decline can be as beneficial to a country’s economy as an interest rate cut.

Consequences Of A Strong USD
However a strong USD is not without its consequences for the U.S. economy, which could eventually affect other countries. The further the dollar appreciates, the more of a headache it provides for the U.S. economy. It presents headwinds for the export sector but as we said earlier, the U.S. is not a trade dependent economy and can therefore handle a stronger currency better than other countries. What is more worrisome is the impact that a strong dollar has on U.S. corporate earnings. The problem is that a strong dollar reduces the value of foreign earnings when they are repatriated. With the S&P 500 hitting new record highs on a near daily basis if earnings start to surprise to the downside, the stock market could nose dive and when that occurs, equity markets around the world including Singapore are likely to follow.

Kathy is a well-known expert in the Forex world and has over 10 years of trading experience in the forex market. She is frequently seen and quoted on international media platforms such as CNBC.

Please click here for more information about this author.

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